Inflation "Documentary" Lacks Evidence

Friday, May 14, 2010


I watched the above video this morning released from National Inflation Association (NIA) entitled Meltup. While purporting to be a documentary I have not seen many films that make more unsubstantiated claims all the while missing many basic economic concepts. Below is a bulleted list of my problems with the film which overlap with many of the general arguments made about our current condition.
  • Using the unemployment rate as a measure of where the stock market should be trading is a complete misunderstanding of the dynamics that drive earnings per share growth over time. The stock market has bounced not due to money printing, rather EPS has risen nicely rebounded aided by productivity enhancements and cost-cutting initiatives. Ultimately, revenue growth is necessary and will come with re-hiring as the economy turns around. Unemployment has, and always will be, a lagging indicator.
  • Oil and copper have bounced significantly off the lows because of an economic turnaround and continued growth in demand in Asia. Claiming the bounce is a result of printing is a muddling of the facts.
  • They claim that if Americans were taxed 100% of their incomes, we would not be able to balance the budget. I have no idea where this claims comes from as our budget deficit is $1.6 trillion while US GDP over $14 trillion. Consumer spending is over $10 trillion of the US GDP all the while consumers are saving a portion of their income.
  • I agree with their claims that the recently passed health care bill will prove to be much more costly than initial estimates. This seems inevitable.
  • They make the far over-reaching claim that if China revalues the yuan "Americans will no longer be able to afford cheap imports from China." I mean, really guys? C'mon. The talk now is for a 20% revaluation. I'm rather certain that does not imply that we'll never buy anything from China again. The exaggeration is obnoxious.
  • I completely agree with the insanity of the US military having bases in 140 countries around the globe and spending $1 trillion a year to maintain them and continue to fight wars. As a country, we cannot afford this luxury. We must consolidate and figure out what interests are most crucial to our future and close up the rest. No serious look at our budgetary problems can ignore the dramatically high portion dedicated to military spending.
  • Claiming that oil traded up to $147 per barrel in early 2008 in the face of declining demand because the government was running deficits is nonsense. What rationale then do you have for it subsequently falling to the $30s? Financial assets will always become over-priced and under-priced often with wild swings especially so in the leveraged commodity markets.
  • Social Security is not a Ponzi scheme as they claim. Ponzi schemes have a group at the top that continues taking money out of the pot while new entrants pay in to the ever-growing base above them. Ultimately it collapses because you cannot find enough people on the bottom. Social Security consists of transfer payments from the working generation to the retired generation. While the retired generation can shrink and grow over time, the people within it eventually die and new people are born into the working generation. We certainly have budgetary problems with it as those paying in relative to those receiving has considerably fallen in the last several decades. Yet, calling it a Ponzi scheme is incorrect.
  • I agree that public sector raises for employees during a recession when the private sector is contracting should not occur. While the government may use its employer of last resort ability to hire more workers, average hourly wages should not rise in deflationary environments.
  • They make an absolutely insane claim that Chinese children are better educated because there is no unemployment insurance or food stamps in the country. I can't even start on this one.
  • There's definitely a dwindling difference between Republicans and Democrats. A diversity of thought is sorely lacking.
  • The over-reaching claim that any tax raises will result in less tax revenue is completely unsupported beyond just saying that Americans are over-taxed.
  • The authors fundamentally misunderstand the use of money printing and inflating the economy. Yes, it does take years for monetary inflation to translate into price inflation. Inflating an economy through central banking actions works to smooth out the pain over a longer period of time. Rather than allow for a deflationary spiral to take hold and a panicked run on the banks to crash the US economy into a depression, the Fed backstopped firms, injected liquidity and lowered interest rates to rock-bottom levels. Of course this comes with consequences down the line but the intention is that it will not be as bad as allowing a total collapse. These are lessons we learned in the Great Depression and are attempting to put into place.
  • The video alleges that the US government artificially manipulates inflation data based on hedonics, the attempt to measure changes in value. So, should the government not measure this crucial factor? A computer that allows someone to accomplish tasks with 20% greater productivity should be equivalent to a computer that allows 80% greater on a price comparison basis? The upward moves in prices must be adjusted for the increases in value. Yes, an egg is an egg is an egg over time but a computer is far from the same fundamental product.
  • The authors are confused about our need to not have debt as a country and seemingly do not get the difference between a budget deficit and overall long-term country debt. A country's debt is a capital allocation decision, much like having a mortgage on a house. But, in a country's case the occupant doesn't die. So, there is no need to not have any debt as long as we can service this debt over time. It may be very useful for us to accumulate debt during difficult times and work to pay it off in better times. While I would say that during good times we need more political willpower to pare down our obligations as a percentage of GDP, I would not argue for entirely getting rid of our debt. As long as a country can produce more than $1 for every $1 it spends to service its debt, it is entirely logical and intelligent to have debt within reason.
  • "We need to go back to Mom and Pop shops with good manufactured in the US." Why? Having a much more highly skilled workforce that focuses on innovation and ingenuity while having the goods manufactured elsewhere is not a bad thing whatsoever. And don't forget that 70% of the US exports are manufactured products. They are just things like jet engines, not paper clips.
My primary issue with this "documentary" is the absurd number of outrageous claims made without any evidence. Throwing together a bunch of seemingly shocking statistics does not mean the case for hyper-inflation has been made. This is filled with a great deal of hyperbole and not much substance.
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